Manisha Arora asked on 30/03/2020

What are the tax implications on NRI on mutual funds?

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SBNRI Team
answered on 30/03/2020

Tax implications on Mutual Funds for NRI: Different types of Mutual Funds are taxed differently

 

*(Equity Funds: An equity fund is a mutual fund that invests principally in stocks)

 

*(Debt Funds: A debt fund is a mutual fund that invests in fixed-interest generating securities such as corporate bonds, government securities)

 

Nature of Profits / Income

Equity Funds* Debt Funds*
Minimum Holding period for Long term capital gains 1 year

3 years

Short term capital gains taxation

15% + 4% cess* = 15.60% As per the tax rate of the investor (30% + 4% cess = 31.20% for investors in the highest tax slab)
Long term capital gains taxation 10% + 4% cess = 10.40% (if the long term gain exceeds Rs 1 Lakh)

(long term gains up to Rs 1 Lakh is tax-free) 

20% with indexation*

 

*(Cess: A cess is a tax on tax that you pay to the government for purposes set by the government. The cess is charged till the objective set by the government is fulfilled. Eg: Krishi Kalyan Cess, Swachh Bharat Cess etc.)

 

*(Indexation: Indexation refers to the technique of adjusting income payments using a price index to maintain the purchasing power of the public after inflation) 

 

Tax implications on mutual funds for NRI is a very complex subject. To make it clearer, let us understand the mediums of investment in mutual funds. NRIs can invest into mutual funds from their NRE and NRO accounts. Now a brief description of these accounts can be understood as:

 

Non-Resident External (NRE): The NRE account can be opened for the purpose of maintaining the income earned outside India with tax free interest (upto 7.60%) on Fixed Deposits. Both the principal amount and interest earned are completely repatriable from India.

 

Non-Resident Ordinary (NRO): The NRO account can be opened for the purpose of maintaining the income earned from India such as income from rent, pension, etc. The repatriation of the money in the account can be done up to a maximum of 1 million USD per financial year. Note: 30% tax + surcharge + education cess will be deducted at the source of interest earned in India (only current income such as rent, pension etc. can be repatriated)

 

Now, a clear understanding of these two accounts makes it clear that for NRE Accounts, since the funds are fully and freely repatriable, any investment done through this account such as in mutual funds will be subject to TDS (Tax Deducted at Source) so that as soon as you get money in your NRE account, that is fully repatriable without any hassle where as for NRO Accounts; it is clearly mentioned that 30% tax + surcharge + education cess will be deducted at the source of interest earned in India.

 

However, you can later claim for a tax refund according to your tax slab. 

 

Income Tax Slab

Tax Rate
Up to 2.5 Lakhs

Nil

2.5 Lakhs to 5 Lakhs 

5%
5 Lakhs to 7.5 Lakhs

10%

7.5 Lakhs to 10 Lakhs

15%
10 Lakhs to 12.5 Lakhs

20%

12.5 Lakhs to 15 Lakhs

25%
15 Lakhs and above

30%

 

So, to summarize Tax implications on mutual funds for NRI: YES! Mutual Funds investments in India are taxable for NRIs and TDS is the major instrument of taxation NRIs are subject to. 

 

Note: NRIs need not pay double taxes. There is a provision called DTAA (Double Taxation Avoidance Treaty). If the DTAA is signed between India and the country of residence of the NRI, the NRI will not be paying double taxes on the same source of income. NRIs will however need to pay differential taxes. (For example: If for a certain investment, taxes are 30% in India and 40% in the USA, NRIs from the USA need to pay the remaining 10% to US.)

 

India has signed DTAA with more than 85+ countries all around the globe including USA, UK, Saudi Arabia and UAE. You can check the list of the countries and find additional information regarding DTAA here.

 

To get expert advisory on Mutual Fund Taxation from SBNRI, contact us using the button below.

 

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